Air Pollution:

Recently, the Supreme Court handed down rulings in Environmental Defense v. Duke Energy Corp. and Massachusetts v. EPA, both of which could have major effects on the utility industry. How would electric utilities react and be affected by carbon dioxide regulation? What is the future of New Source Review as the Duke decision goes back to the lower courts? During today's OnPoint, Scott Segal, director of the Electric Reliability Coordinating Council (ERCC) and a senior industry lobbyist, discusses his industry's reaction to the two rulings. He discusses the details of the Duke case and talks about what to expect as it heads back to the lower courts for consideration. Segal urges Congress to go beyond cap-and-trade talks and consider a variety of options to address climate change including tax incentives, land conservation and building efficiency.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Scott Segal, director of the Electric Reliability Coordinating Council and a senior industry lobbyist. Thanks for coming back on the show Scott.

Scott Segal: Glad to be here.

Monica Trauzzi: Scott, two major decisions by the Supreme Court recently that could have major impacts on the utility industry. Let's start off with the Duke Energy case. In a nutshell, what does this really indicate?

Scott Segal: Well, the Duke Energy case obviously deals with the New Source Review Program, which is something that we've spent a lot of time in this show and all across Washington talking about over the last several years. In fact, the reason ERCC, my organization, came together was to work on sensible Clean Air Act implementation and enforcement policy related to the New Source Review 1999 enforcement initiative. So we were waiting with some anticipation for the court to rule. Now the court ended up ruling very narrowly in the Duke case. It was a unanimous decision, and the way it ought to be unanimous is that the court only ruled that the 4th Circuit Court of Appeals down in Richmond had erred by not allowing the EPA the flexibility to use two different definitions of the word modification as it appeared in different parts of the statute. That's only one of many issues that are still on the table regarding New Source Review enforcement cases. For example, as I often say to folks in the press, what two words do I always say in reference to New Source Review? And the answer is "routine maintenance." But if you search the entire court decision the court doesn't reference routine maintenance, so that issue is still very much alive and on the table. Justice Souter, who wrote the majority opinion, actually said that the question of fair notice, whether or not the EPA had sort of changed its interpretation and its definition over the course of 20 years of previous precedent. And did it do so by giving the regulated community ample opportunity and notice and opportunity for comment, that issue, which we shorthand as fair notice, also on the table as Justice Souter says. And there are other questions as well that are still open. Just two days before the Supreme Court ruled in Duke yet another Federal District Court ruled that the routine maintenance exception was big enough to justify moving forward with certain projects without going through the full New Source Review permitting process. So all in all, a lot of live issues still. If the court had ruled the other way and had dismissed the EPA enforcement case against Duke, predicated on this canon of construction issue, now that would have been big news because it would ended the enforcement initiative. But by ruling the way it did it still leaves live most of the defenses that folks in NSR suits are still alleging.

Monica Trauzzi: So no surprises?

Scott Segal: Well, anytime I think a court reaches a unanimous decision in this day and age it is surprising. We were obviously disappointed in it, but in terms of lasting impact or the footprint of the decision I don't think it's very deep.

Monica Trauzzi: So like you said, the case is being remanded to lower courts for further consideration. What are you expecting now that the case is heading back to lower courts?

Scott Segal: Well, in a real sense the immediate work for the 4th Circuit Court of Appeals won't be too great because their decision that the Supreme Court was actually reviewing was itself kind of a quirky opinion and relatively narrow. The heavy lifting will be in the middle District of North Carolina, the trial court, where Duke still has many live defenses at its disposal, like routine maintenance, like fair notice, and like other arguments as well that have been briefed and will now proceed forward.

Monica Trauzzi: What does this ruling mean for the utility industry?

Scott Segal: Well, what it means is an opportunity was lost to achieve a degree of clarity with respect to the New Source Review program. And that's too bad, we were all hoping for that. I know I think even the environmentalists were hoping that there would be some clear direction given to the program. So instead one playing piece has been removed from the table, everything still remains in place, and so it looks like we still have a lot more litigation to go before we would reach a final conclusion.

Monica Trauzzi: All right, let's talk about NSR for a moment. How important is NSR going to continue to be over the coming years? Do you think it's going to lose some of its enforcement powers?

Scott Segal: You know, as I sit here today and look forward one of the real challenges that NSR will face as an issue is squaring the environmentalists' position on New Source Review with the environmentalists' position on global climate change. In the climate change context the environmental community seems to argue that they would like to see the efficiency of existing power plants be improved and do so on a fairly short order basis. The trouble is any time you do and efficiency improvement project another part of the environmental community says, no, that should be the basis for Clean Air Act enforcement under the New Source Review Program. And so what we've got is two different thrusts that are going in different directions. And, frankly, it's a somewhat hypocritical position for those that have been opposed to the utility industry. I hope, on a going forward basis, that as Congress considers systemic reform to the Clean Air Act or maybe even carbon legislation, they'll use that opportunity to square the circle and to address New Source Review as well.

Monica Trauzzi: ERCC was an amicus in the case. How does the ruling affect the work that you guys are doing?

Scott Segal: Well, I think it certainly increased the interest that people have in the New Source Review program. The number of hits we got after the Supreme Court decision at Electricalliability.org went up significantly. So we've got some work to do. The Environmental Protection Agency is likely going to continue in additional iterations of its New Source Review reform efforts. The one thing Justice Souter said very, very specifically in this majority opinion is that EPA does have some customary discretion to define terms as they see fit consistent with the statutory scheme. That seems to me to be an invitation to reform the NSR program and to use that discretion in the direction of flexibility. So I think we're going to see more reform efforts and that means ERCC is going to have to explain those efforts.

Monica Trauzzi: On to the Supreme Court's ruling in Massachusetts v. EPA. Obviously regulation of CO2 or a mandatory cap on emissions could really impact coal powered utilities. Are you concerned about what this ruling could mean for the utility industry?

Scott Segal: Well, it's interesting. The ruling basically says that the definition of pollutant within the Clean Air Act is sufficiently broad that it includes carbon dioxide. And that's really all the decision says. That is the beginning of an analytical process, not the end of the process. So the court, for example, did not rule that the Environmental Protection Agency has to establish a cap on carbon dioxide emissions. That would only come after the establishment of a significant administrative record, and then applying the findings, not only in the mobile source program, which was at issue in the Supreme Court case, but also to the stationary source programs that deal with power plants and the like. That said, no one in the power industry needed a gig from the Supreme Court to know that it is time to do careful, analytical work on global climate change under carbon emissions. That's why every company that I work with and every company that I know of in the sector is very carefully taking its obligations seriously and looking very closely at what carbon regulation might mean and what the smartest approaches might be to address carbon emissions. For example, now that the Supreme Court has sort of teed up the issue again I think it's time for Congress and other policymakers to consider that there are more players on the field than just a carbon cap and trade program. We ought to look very closely at tax policies. We ought to look at market oriented policies that bring new transformational technologies to market. We ought to look at tax incentives, as Speaker Gingrich recently very persuasively articulated in his debate against Senator Kerry. We ought to look at land conservation policies. We ought to look at building efficiency and apply ...

Monica Trauzzi: But a cap on emissions should play a role?

Scott Segal: Well, everything is on the table now. I think anyone who comes before you and says everything but this policy is probably not being as clear as they could be. Everything is on the table now, but what we need to do is to do the serious homework that is necessary to figure out which of the policies is the best. For example, if I say to someone on Capitol Hill, "What do you think the toughest climate change policy is?" And they say, "Well, I don't know, Senator Boxer's bill for example," which is the most intensive of the carbon caps. But if the net effect of that legislation is to drive productive assets in the United States overseas to countries that don't stress energy efficiency and have a worst carbon profile, then the net effect of a bill like that could be the increase of carbon emissions.

Monica Trauzzi: So are the Democrats not handling this correctly? Should they be going another route?

Scott Segal: Well, the only criticism I would offer up of current debates on Capitol Hill is they're not open enough. They're not iterative enough. What we need to have is an open and robust debate of carbon policy on Capitol Hill. And that means not limiting it just to cap and trade but also opening it up to look at tax policies, incentives and to look at market oriented policies, the development of new technologies and the expansion of those new technologies. The reality is this, if you use the stick of a cap and trade program, and that's all you have to offer on carbon dioxide policy, you won't address the underlying problem nearly as effectively as if you encourage the development of new technologies and offer the carrot so that those technologies will defuse, not only through the United States, but around the world.

Monica Trauzzi: What about the financial aspects of the decision? Will the electric utilities lose revenue?

Scott Segal: Well, it's important to put the decision in perspective. First, the beginning of an analytical process, not the end of it. So we don't know what regulatory approach might develop, if any, because it is possible for the Environmental Protection Agency to say as a matter of law carbon dioxide should be considered a pollutant. But that it need not be regulated because it either cannot be regulated under the mechanisms currently available under the Clean Air Act or to regulate it might cause trade-offs with other environmental pollutants or the administrative record doesn't justify a regulation at this time. There are all those different approaches before you get to a final outcome. The fact of the matter is, I think anyone looking at the value, the very really value the utility sector provides to the American economy already is thinking about, well, what happens if there's a carbon approach? How do utilities fare in a carbon constrained world? So I don't think the Supreme Court decision really materially changes that view.

Monica Trauzzi: All right. We're going to end it right there Scott. Thanks for coming on the show.